SAFE Circular 75 - The Key Provisions of Circular 75 and What They May Mean for Investors

February 1, 2006 — 1,907 views  
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SAFE Circular 75[1]

The dust is beginning to settle on the effect and fate of SAFE Circular 11 and Circular 29, at least for the time being. On October 21, 2005, SAFE issued the long awaited new circular on “Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles" ("Circular 75"),[2] effective November 1, 2005. At the same time Circular 11 and Circular 29 will cease to be implemented.

On October 23, 2005, SAFE also issued a news release about the issuance of its Circular 75 (the “SAFE News Release”). In the SAFE News Release, SAFE makes it clear that the efforts by Chinese private companies and high technology companies to obtain offshore financing are being encouraged by China’s national policies. Circular 75 confirms that the use of offshore special purpose vehicles (“SPV”) as holding companies for PRC investments are permitted as long as proper foreign exchange registrations are made with SAFE.

We believe that this is a positive development for venture capital, private equity and other foreign investors, although it is still too early to assess the long term effect this new circular will have on PRC companies seeking to obtain offshore equity financing through offshore SPVs.

This Special Note summarizes the key provisions of Circular 75 and what they may mean for investors.

Offshore Equity Financing by PRC Companies Via SPVs Officially Sanctioned by SAFE

In Circular 75, SAFE has substantially altered its position on offshore equity financing by PRC residents by way of offshore SPVs. In Circular 11 and Circular 29, SAFE was perceived by the market as attempting to control and curtail the gradual expansion of the quiet and yet widely known practice of “hui cheng” or “roundtrip” investment. This is the process of PRC residents effectively moving ownership and control of PRC-based assets to an offshore holding company by transferring those assets to a wholly foreign-owned enterprise that is held by the offshore SPV, usually a company established in the Cayman Islands or BVI. The SPV is used as a vehicle to obtain financing to facilitate the operation of the assets and expansion of the business. In contrast, in Circular 75, and in the SAFE News Release, in particular, SAFE now describes the practice of PRC residents obtaining offshore equity financing through establishing SPVs and roundtrip investments in PRC companies as part of the development of the private sector that will be “encouraged, supported and guided.”

This change of tone on the part of SAFE is significant and should be welcome news to PRC residents whose PRC domestic companies are actively seeking offshore equity financing. Circular 75 is also a positive signal to foreign private equity funds and venture capital funds, whose investment plans in China’s fast-growing enterprises run by entrepreneurs were largely put on hold since the beginning of 2005 by the promulgation of Circular 11 and Circular 29, due to vagueness of regulation, lack of articulated procedure for obtaining SAFE approvals, and uncertainty of the future direction of offshore equity financing by PRC companies via SPVs.

Multiple Approvals No Longer Needed

Before Circular 75, Circular 11 expressly required SAFE’s approval in order for any PRC resident to directly or indirectly establish or obtain control of a foreign company. SAFE’s approval was also required for any PRC resident to exchange domestic assets or equity interest for stock or assets of a foreign company. Such approvals, however, have only rarely been given.

In a major change of position, SAFE now only requires PRC residents to register with SAFE rather than obtain SAFE's approval. This appears to more effectively reflect its role as managing foreign exchange activities rather than investment control.

Multiple Foreign Exchange Registrations Will Require Detailed Disclosure by Relevant Parties

Circular 75 is not all good news, however. While effectively revoking the perceived ban on PRC residents obtaining offshore equity financing via SPVs, Circular 75 requires multiple foreign exchange registrations entailing detailed disclosure by the relevant parties involved in the specified offshore equity financing transactions. These required registrations include:

1. The Initial Foreign Exchange Registration by PRC Residents

Under Article 2, before establishing (or gaining control of) an offshore SPV for the purpose of offshore equity financing, a PRC resident (whether a resident individual or a legal person) must file at least six required documents with local SAFE for foreign exchange registration in connection with the proposed offshore investment (the “Offshore Investment FX Registration”).

Of the six documents required for such registration, Document #1 requires the disclosure of (i) information about the domestic PRC company, (ii) the equity structure of the proposed SPV, and (iii) the arrangement for the offshore financing. If the PRC resident is a resident individual, Document # 5 requires basic information of the PRC resident and additional information of the offshore SPV as listed in the form attached to Circular 75 (the “Attached Form”).

In addition, the PRC legal person (a company, usually) must also submit two approval certificates (i) concerning the source of foreign exchange capital (assets), and (ii) the proposed offshore investment. Presumably, the first certificate is to be obtained from local SAFE, and the second certificate is to be obtained from the Ministry of Commerce (“MOFCOM”) or its local counterparts. Among the documents that are required for the foreign exchange registrations, obtaining these two approval certificates may be more time consuming and unpredictable than getting the other documents. There is a strong presumption that once having obtained these approvals, SAFE would not use this process or other administrative means to reject and deny otherwise legitimate application by PRC residents to establish an offshore SPV.

SAFE completes the Offshore Investment FX Registration by a domestic resident by affixing a SAFE business chop on the application once it has verified the application documents submitted to SAFE.

2. The Amendment to the Foreign Exchange Registration by PRC Residents

Under Article 3, when a PRC resident contributes to the SPV the assets or equity interest in a PRC company, or when the PRC resident undertakes an offshore equity financing after contributing the assets or equity interest to the SPV, the PRC resident is to file another set of six documents to amend the Offshore Investment FX Registration. These documents show how the PRC resident’s equity in the SPV has changed.

Document #1 requires the disclosure of (i) information of the change of equity interest in the domestic PRC company and in the SPV, and (ii) the method for the determination of price for the assets and equity interest in the PRC company and in the SPV. If the PRC resident is a resident individual, Document # 2 requires basic information of the PRC resident and, the additional information of the offshore SPV as listed in the Attached Form.

In addition, the PRC resident must also submit one approval certificate for the roundtrip investment by the SPV from competent PRC authorities in charge of foreign investment. We assume that this certificate is the approval certificate obtained from MOFCOM or its local counterparts.

Finally, if any state-owned asset is involved, confirmation document by the state-owned asset administration concerning the value of the assets or equity interest of the relevant PRC company must be obtained first, and then submitted to SAFE for verification.

3. Foreign Exchange Control Formalities of Foreign Investment or Foreign Debt by PRC Companies

Under Article 5, when a SPV makes roundtrip investments or provides shareholder loans to a PRC company using the funds obtained from the offshore financing, the relevant PRC company must handle foreign exchange registration formalities in accordance with effective PRC laws and regulations.

4. Amendment to Foreign Exchange Registration by PRC Residents for Material Changes

In addition to the registration requirement under Article 2, Article 3, and Article 5, Article 7 of Circular 75 imposes yet another requirement for a PRC resident to amend the foreign exchange registration whenever material events occur that affect the capital structure of the SPV which does not involve a roundtrip investment. These events may include an increase or decrease of capital, transfer or swap of equity interest, consolidation or a split, long term equity or debt investment, or guarantee provided for a third party. The amendment to registration must be done within 30 days of the occurrence of the material event.

Transfer of Funds from SPV Back to China

After the completion of the offshore equity financing, the PRC resident may repatriate the capital that has been raised back to China, in accordance with the original business plan. It is important to note that no specific time is given for when this is to occur.

Foreign currencies obtained from profit, dividends and from sale of equity interest in a SPV, however, must be remitted back to China within 180 days of receipt thereof.

Key Terms Defined

Circular 75 provides fairly detailed definitions for four principal terms: (1) special purpose vehicle, (ii) roundtrip investment (“返程投资”), (iii) domestic residents, and (iv) control.

Of particular interest is the definition of special purpose vehicle, which is defined as “an offshore enterprise directly established by or under the indirect control of a domestic resident legal person or a domestic resident individual using his or her assets, or equity interest held, in a domestic enterprise, for the purpose of offshore equity financing (including convertible debt financing).” This definition makes it clear that if the SPV is not established for the purpose of offshore equity financing, then Circular 75 will not be applicable.

It should be noted that a "domestic resident individual" includes both a resident with a PRC passport/identification card, and an individual, who although does not have a legal status in the PRC, but who for economic reasons, "habitually" resides in the PRC.

“Roundtrip investment” and “control” are both broadly defined to capture the common arrangements or schemes for the offshore SPV to invest in domestic companies, and for the domestic PRC resident to control the SPV.

Retroactive Registration

For PRC residents who established (or obtained control of) an offshore SPV before November 1, 2005, and who completed the roundtrip investment, but have not carried out the required foreign exchange registration for offshore investment, Circular 75 requires that they carry out the retroactive registration with a local SAFE before March 31, 2006. After the PRC resident has completed the retroactive foreign exchange registration, local SAFE can handle the foreign investment or foreign debt registration for the relevant PRC company.


At this point, the published text of Circular 75 and the SAFE News Release are the only information available with regard to Circular 75. It is likely that Circular 75 may be further clarified by SAFE, whether through written documentation to be issued later, through oral discussions or comments by officials from SAFE or its local branches, or more importantly, through implementation by SAFE in connection with actual transactions. Additionally, MOFCOM and other Chinese government ministries or departments may issue regulations that will shed more light on Circular 75.

While the market will be watching how Circular 75 is implemented, it nonetheless provides significant hope that SAFE is now moving in a direction that will permit a return to greater ease in establishing the types of legal structures and permitted the kind of financing that has been critical for the development of venture and private equity financed companies operating in China.


[1] This Special Note is a follow-on note to a memorandum we prepared on the two previous circulars issued by China’s State Administration of Foreign Exchange (“SAFE”), commonly referred to as Circular 11 and Circular 29. The previous memorandum can be found at

[2] Text of Circular 75 can be found at

Morrison & Foerster LLP